Value stock and growth stock are two categories of stock that are based on the historic financial stability of their companies. Factors such as a company’s debt ratio, recent earnings, and any legal problems can all affect whether a stock is viewed as a growth or a value stock. In many cases, the stock may move from one category to the other, depending on what is happening with the company. The long-term returns, like everything else associated with stocks, can vary significantly, but there are some general trends that investors should be aware of.
Value stock comes from companies whose stock is considered to be undervalued. There can be many reasons for this, including the fact that it is a new company, or the organization may be having legal or financial troubles. Investors often purchase value stocks because of their low price, and hang onto them in the hopes that the companies can recover and the stocks will take a big jump in price, providing a nice profit for the investor.
Growth stock tends to come from companies that have done well in the past and expectations are that they will continue to do as well or better in the future. Such companies are typically technology companies, and they often reinvest their earnings instead of paying dividends to stockholders. These stocks tend to be higher priced than other, similar stocks, but investors are willing to pay the price in order to gain the relative stability these stocks offer.
Both value and growth stocks have risks associated with them. When purchasing value stocks, the risk is that the reasons for the stock being relatively cheap in the first place may ultimately cause the company to close its doors. A new company may fail to secure its place in the market, or financial and legal troubles that are plaguing a company may cause it to fold. Growth stock companies tend to be more stable, but they are still susceptible to sudden shifts in the market. A poor earnings reports, the failure of a new product release or the appearance of a new competitor can cause a sudden drop in the price of growth stocks.
Some experts feel that, while growth stocks have performed well in the past, those who rely heavily on such stocks will be disappointed if the stocks do not continue to increase in value. Value stocks, while potentially somewhat riskier than growth stocks, also have more earnings potential. Studies such as the 13-year study reported in the “Journal of Portfolio Management” have shown that the long term returns are better for value stocks than they are for growth stocks, despite annual fluctuations.
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